|
|
You may be familiar with all sorts of deductions, especially if you are a regular Schedule A filer, yet the term “Deductible Taxes” might be a little confusing. You could think that it refers to what can be deducted from your income taxes, when it actually refers to the kind of taxes you paid that can be deducted on your tax returns.
|
|
The IRS specifies that to be deductible, the tax must be imposed on you and must have been paid during your tax year. Federal deductions for taxes paid help you avoid having to pay income taxes on money that you have already committed to paying other taxes on, which would be a case of double taxation.
|
|
|
- Deductible taxes may be claimed only as an itemized deduction on Form 1040, Schedule A, Itemized Deductions.
|
|
|
There are four types of deductible non-business taxes:
|
|
- State, local and foreign income taxes,
|
|
|
- State and local general sales taxes,
|
|
|
- State, local and foreign real estate taxes, and
|
|
|
- State, and local personal property taxes.
|
|
|
Most states and some local governments (cities and counties) impose income taxes. For most taxpayers, income comes from salary, wages, and tips, but interest earned and dividends qualify as income too, as well as other benefits, such as pensions, annuities, gambling winnings, rental income, etc.
|
|
| Your state and local income taxes can be found on the W-2 Form that your employer gives you at the end of the year. |
|
|
In addition to the state and local income taxes, you can also deduct:
|
|
- Any estimated taxes you paid to state or local governments during the year,
|
|
- Any prior year's state or local income tax you paid during the year, and
|
|
- Any mandatory amounts withheld from your wages that are used to pay for benefits to protect against your loss of wages, such as state programs that provide disability or unemployment insurance benefits.
|
|
|
You can elect to deduct state and local general sales taxes instead of state and local income taxes, but you cannot deduct both. If you elect to deduct state and local general sales taxes, you can use either your actual expenses or the optional sales tax tables to calculate the amounts.
|
|
|
|
|
|
To deduct the actual amount of your sales taxes paid for the year, you'll need every receipt for all things you bought during the year, such as receipts from grocery stores, restaurants, and department stores. Add up the sales taxes from the receipts, and claim that amount as your deduction.
|
|
|
If you use the calculator provided by the IRS, this will give you a standard deduction that's based on special sales tax tables created by the IRS. The calculator will give you the same result as if you use the worksheet and tables in the Schedule A instructions. If you’re wondering about self-employment taxes, these are paid by business owners for Social Security/Medicare. The amount is based on the profit of the company, but the business does not pay these taxes, they are paid on the individual's personal tax return.
|
|
|
|
|
|
Foreign income taxes are taxes that are charged on your income by a country other than the US. Generally, you can take either a deduction or a tax credit for foreign income taxes imposed on you by a foreign country or a United States possession.
|
|
|
|
|
|
|
|
Deductible real estate taxes are generally any state, local, or foreign taxes on real property levied for the general public welfare. They must be charged uniformly against all real property in the jurisdiction at a like rate.
|
|
|
Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, you can increase the cost basis of your property by the amount of the assessment. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.
|
|
|
If a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account. You can deduct only the amount actually paid out of the escrow account during the year to the taxing authority.
|
|
|
Real estate taxes paid at settlement or closing are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible on Schedule A.
|
|
|
Deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.
|
|
| If you receive a property tax refund from your state or local government, you must discount your deduction by the amount of the refund. |
|
|
|
|
| The deduction for real estate and personal property taxes is an adjustment item for calculating the alternative minimum tax (AMT), meaning that personal property taxes are deductible when calculating the regular federal income tax, but not deductible when calculating the AMT. Taxpayers who are impacted by the AMT will obtain little or no reduction in their federal tax liability by using the personal property tax deduction. |
|
|
It is important to remember to keep all the documents that specify how much deductible tax you paid during a tax year.
|
|
| Some taxes and fees cannot be deducted on Schedule A, such as: |
|
|
|
|
|
|
|
- Transfer taxes (or stamp taxes) on the sale of property,
|
|
- Homeowner's association fees,
|
|
- Estate and inheritance taxes, and
|
|
- Service charges for water, sewer, or trash collection.
|
|
Remember that you may be subject to a limit on some of your itemized deductions including non-business taxes. In addition to these limits, your total itemized deductions may be phased out based on your adjusted gross income.
|
|
| If you've paid any of the deductible taxes, you should take the time to see if your itemized deductions are more than your standard deduction. Of course, hiring a tax professional would be a worthwhile small investment to help you recover a lot of the taxes you paid when filing your tax returns for the year. |
|
|
|
|
